Stocks Plunge after Hours Following Fed Discount Rate Hike
stock indices plunged after the close following a discount rate hike by the
Federal Reserve. Although the hike was not a surprise per se since Bernanke and
the FOMC minutes hinted it would happen, the timing caught traders by surprise.
While not actually tightening the financial system, the Fed
sent a signal that the stimulus days are ending and that more rate hikes should
be expected. Stock indices sold off in post-market activity.Earlier in the trading day, the March E-mini
pierced the psychological 1100.00 barrier triggering an acceleration near a
.618 retracement price at 1107.00.Buying dried up at 1106.75 until the close.
The markets traded higher throughout the day although in a volatile
manner. Weak U.S. Weekly Jobless Claims came out higher than expected, driving
stocks lower this morning, but investors quickly bought the dip before rallying
after the release of the bullish leading indicators report and the Fed
Strong economic news kept downside pressure on the March
Treasury Bonds. The move by the Fed to hike the discount rate is putting
further pressure on the market overnight. Technically, this market took out two
key retracement levels at 117â€™01 and 116â€™14. Both of these prices are now new
resistance. Downside momentum could trigger a further break to the cluster of
support between 114â€™16 and 114â€™24.
The report that the Fed hiked the discount rate sent
commodities sharply lower. Both April Gold and April Crude Oil broke on the
news as the Dollar rose and the Euro tumbled. Wednesdayâ€™s closing price
reversal top in gold was confirmed setting up a possible decline to
$1086.80.April crude oil is trading
lower during the after-market session after testing a .618 retracement level at
79.17 during the day session. A follow-through to the downside could trigger a
break to 74.73.
The U.S. Dollar is mounting a strong rally late in the
trading session following news that the Fed is set to hike the discount rate 25
basis points to 75 basis points. While not actually beginning a tighter
monetary policy, a hike in the borrowing rate charged to member banks is a sign
that the Fed is getting ready to begin removing stimulus and raising other key
interest rates.The Dollar is rallying
because the rate hike tightens the interest rate differential between the U.S.
and other foreign nations.
On Thursday, the Dollar had a volatile trading session
triggered by economic reports and rumors of intervention. The Greenback opened
higher, driven by spillover from Wednesdayâ€™s strong U.S. economic data. Early during
todayâ€™s session the Dollar got a boost from mixed economic news. The Producer
Price Index was higher than expected, but weekly jobless claims rose. This was
followed by a better than expected Leading Indicators report and Philadelphia
Initially, these reports supported the Dollar but a recovery
in the equity markets encouraged speculators to demand more risk. This slowed
down the upside momentum in the Dollar as intra-day profit-takers took over.
The Greenback accelerated to the downside on unconfirmed
rumors that China and Russia
were buying the Euro. After a sharp break, conditions settled and the Dollar
turned positive once again. Later in the session, it was confirmed that Russia
was actively buying foreign currencies. The recent weakness in the Forex
markets has driven the Ruble to a 14-month high. Both Russia and perhaps China feel the need to protect
their export markets by driving up foreign currencies.
News that the Fed is planning to hike the discount rate sent
the Euro sharply lower late in the trading session. The heavy selling pressure
took out the recent bottom at 1.3531 although it failed to accelerate to the
downside once this price was pierced.
The March Euro had an extremely volatile morning session.
Stronger than expected U.S.
economic reports put pressure on the Euro early in the session, but speculation
that China and Russia
were buyers turned the Euro around. Intra-day trailing stops were hit as the
market rallied, turning the Euro positive for the day. The rally was
short-lived, however, as buyers failed to support the market on the subsequent
retracement. Although the Euro weakened at the mid-session, it managed to
maintain the low for the day at 1.3539.
The move by Russia
and most likely by China
could create volatile trading conditions. According to the recent CFTC
Commitment of Traders Report, over $8 billion of short positions are being
wagered against the Euro. Further interventions by these two countries could
create a classic battle between Russia,
and the short hedge funds.
The shorts want to see fresh money coming in so they can
initiate new positions. The buyers want to create fear to encourage the weaker
shorts cover their positions, thereby driving up the Euro.It will be interesting to see if China and Russia continue to support the Euro
on weakness especially since the current break is being driven by the Fedâ€™s
action. Nonetheless, intervention is out there and traders should be aware of
the volatility it can create.
The March British Pound finished sharply lower. U.K.
economic pressures continued to push the British Pound lower. Although there
was a slight short-covering rally mid-morning, the currency was never able to
turn positive. Expectations are for the Pound to continue to drift lower as
fear that the U.K. recovery
is falling far behind the U.S.
is encouraging traders to keep up the selling pressure. The weak close has this
market in a position to take out the recent bottom at 1.5534.The action by the Fed to raise the discount
rate is helping to put additional pressure on the Cable.
The March Japanese Yen plunged to the downside after it was
reported the Fed was set to hike the discount rate by 25 basis points. This
move by the Fed helped to increase the interest rate differential thereby
making the Dollar a more attractive investment. Overnight the Bank of Japan
said it would refrain from buying Japanese Bonds. This gave the Yen a slight
boost until better than expected U.S. economic reports gave
investors strong reasons to sell the currency.
The hike in the U.S. discount rate sent commodities
lower, taking with them the Canadian Dollar. A surge in Canadian inflation
underpinned the March Canadian Dollar overnight, but stronger than expected U.S. economic
data turned the market around. Lower gold prices and mixed crude oil results
also encouraged traders to sell the Canadian Dollar. The U.S. Dollar could
rally further if the hike in the discount rate causes stocks, gold and crude
oil to fall sharply.
The March Swiss Franc fell after the Fed hiked the discount
rate late in the trading session. This pair traded higher earlier in the
session after talk circulated that the Swiss National Bank had intervened once
again. The mid-morning short-covering rally in the Euro gave the Swiss Franc a
boost, but these gains were erased once the Euro turned lower for the session.
The move by the Fed tightened the interest rate differential between the two
countries, forcing investors to adjust their positions.
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Tue 31 July 2018 AA JP- Bank of Japan A 06:00 DE- Retail Sales A 09:00 EZ- flash HICP/GDP AA 12:30 US- Core PCE Deflator A 14:00 US- CB Consumer Confidence Wed 1 Aug 2018 A Final Mfg PMIs AA 12:15 US- ADP Private Payrolls A 15:00 US- EIA Crude AA 18:00 US- Federal Reserve Decision Thu 2 Aug 2018 AA 11:00 GB- Bank of England Decision A 13:30 US- Weekly Jobless Fri 3 Aug 2018 A Final Services PMIs AA 12:30 US- Employment A 12:30 US/CA- Trade
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